Aggregates related to national income - GDP

Correct answer: A. Purchase of an old company bond

Explanation: Buying an old company bond transfers ownership of an existing financial asset from one person to another. The transaction itself does not produce a new good or service during the current period, so its purchase price is not included in GDP. In contrast, new furniture, barber services, and a newly created software licence represent current production and can be included when properly measured.

Correct answer: A. It is not a payment for current production

Explanation: A government pension is a transfer payment. It redistributes purchasing power to a recipient but is not made in exchange for a good or service produced during the current period. Including the pension itself in GDP would count a transfer rather than production. If the pensioner later uses the money to buy newly produced goods or services, that subsequent consumption expenditure may enter GDP through the relevant production activity.

Correct answer: A. Depreciation is increasing

Explanation: GDP at market price is a gross measure, whereas NDP at market price is obtained after subtracting depreciation, also called consumption of fixed capital. Therefore, GDP_MP − NDP_MP = depreciation. If this gap becomes larger, the value of capital consumed or worn out during production has increased. Net exports, foreign income, and government consumption do not determine this specific difference.

Correct answer: A. It is the market value of final goods and services produced within domestic territory

Explanation: GDP at market price is the market value of all final goods and services produced within a country’s domestic territory during a specified period, usually one year. “Domestic” refers to the location of production, “final” prevents double counting of intermediate goods, and “market price” includes the prices paid by purchasers. It is not foreign income, taxes alone, or a depreciation-adjusted measure.

Correct answer: A. When production takes place within domestic territory

Explanation: GDP measures the value of final goods and services produced within a country's domestic territory. Domestic income measures the factor incomes generated by production within that territory. Thus, when production occurs inside the domestic boundary, both concepts refer to the same domestic economic activity, although their measurement approaches differ.

Correct answer: A. To include domestic production and exclude foreign production

Explanation: Exports are goods and services produced within the domestic economy but purchased by foreigners, so they must be added to domestic output. Imports are produced abroad but may be included in consumption, investment, or government spending. They are subtracted so foreign production is removed from GDP.

Correct answer: A. The service was produced within domestic territory

Explanation: GDP follows the domestic-territory principle. It includes the market value of final goods and services produced within the country’s economic territory during the accounting period, whether the customers are residents or foreigners. A hotel stay is a current service produced locally, so spending by foreign tourists contributes to domestic GDP. Therefore, option A is correct.

Correct answer: A. New wheat sold by a farmer this year

Explanation: GDP records the value of final goods and services produced during the current accounting year. Wheat newly produced by a farmer this year represents current output and is therefore included, subject to avoiding double counting. Reselling a car produced last year does not represent current production, share transfers are financial transactions, and pensions are transfer payments. Hence, A is correct.

Correct answer: A. Factories and offices located in the country

Explanation: GDP measures the market value of final goods and services produced within a country’s domestic territory during a specified period. Therefore, factories and offices physically operating within the country are included, regardless of whether their owners are domestic or foreign. Citizens’ property abroad is not part of domestic territory, while foreign embassies generally belong to the territory of the sending country.

Correct answer: A. As domestic production and a service export

Explanation: The film is produced within the country’s domestic territory, so the value of its current production contributes to domestic production and therefore to GDP. Because the buyer is a foreign OTT platform, the sale represents an export of an audiovisual or digital service. It is not a transfer payment, resale of an old asset, or factor income from abroad.

Correct answer: A. Because production occurred within India’s domestic territory

Explanation: GDP follows the domestic or geographical principle: it includes the value of final goods and services produced within a country’s domestic territory during the accounting period. Ownership and nationality of the producing firm do not determine GDP. Therefore, a foreign-owned company manufacturing mobiles inside India adds its domestic production to India’s GDP, although profits sent abroad may affect national income measures.

Correct answer: C. 10900

Explanation: Using the expenditure method, GDP = C + I + G + (X − M). Substituting the values gives GDP = 7000 + 2500 + 1800 + (1200 − 1600) = 11300 − 400 = 10900. Since imports are subtracted from exports to obtain net exports, the correct answer is 10900, option C.

Correct answer: A. Because commission is payment for a current service

Explanation: The sale of an old share is a transfer of an existing financial asset, not the production of a new good or service during the current period. Its sale value is therefore excluded from GDP. A broker, however, performs a current intermediation service, and the commission paid for that service represents current production that may be included in GDP.

Correct answer: A. Depreciation is not deducted from it

Explanation: GDP is called a gross measure because it measures the value of final goods and services before deducting consumption of fixed capital, commonly called depreciation. If depreciation is deducted from GDP, the resulting measure is NDP. Therefore, the defining distinction between gross and net aggregates is whether depreciation has been deducted.

Correct answer: A. Because it provides a housing service

Explanation: An owner-occupied house provides housing services to its owner even though no actual rent is paid in a market transaction. National income accounting estimates the rental value of this service, called imputed rent, and includes it in GDP so that owner-occupied housing is treated consistently with rented housing. It is the service, not the house's resale value, that is counted.

Correct answer: B. Income from illegal drug trade

Explanation: Official GDP estimates generally exclude illegal activities such as drug trafficking because their output and income are difficult to observe, verify, and measure reliably within official statistical systems. Legal market production, paid transport, and new construction are normally recorded when they meet the requirements for inclusion. The exclusion is mainly a measurement and legality issue.

Correct answer: A. It is not a reward for current production

Explanation: A capital gain is an increase in the market price of an existing asset, such as land, shares, or a house. It does not arise from the production of a currently produced good or service during the accounting period. GDP measures current production, so a mere change in an asset’s price is excluded. The answer is A.

Correct answer: A. In government final consumption, a good or service is purchased

Explanation: Government final consumption expenditure represents the government’s purchase of currently produced goods and services, such as public administration, defence, or certain publicly provided services. These purchases contribute to measured GDP. A transfer payment, such as a pension or scholarship, is made without receiving current production directly in return, so the transfer itself is not included in GDP.

Correct answer: A. Output of a foreign-owned factory located within the country

Explanation: GDP is based on the location of production. A foreign-owned factory operating within the country’s domestic economic territory produces goods and services that are included in that country’s GDP. However, the profits may accrue to foreign owners and later flow abroad. This is why GDP and national income can differ through net factor income from abroad.

Correct answer: A. Sale of an old machine

Explanation: The sale of an old machine is a transfer of ownership of an asset produced in an earlier period, not current production. Counting its full resale price in the current GDP would count the machine again. However, any newly produced brokerage, transport, repair, or other service directly connected with the sale may be included because those services are current production.

Correct answer: A. When subsidies exceed indirect taxes

Explanation: The difference between GDP at market price and GDP at factor cost equals net indirect taxes: GDP_MP - GDP_FC = indirect taxes - subsidies. This difference becomes negative when subsidies are greater than indirect taxes. Depreciation, population growth, and the export-import difference do not determine this particular price-cost adjustment. Therefore, option A is the only correct answer.

Correct answer: A. Agent commission on the sale of an old flat

Explanation: The resale of an old flat is a transfer of an already existing asset, so the flat’s entire sale price does not represent current production and is not counted again in GDP. However, the real-estate agent provides a current brokerage service. The commission is payment for that newly produced service and is included in GDP. Therefore, option A is correct.

Correct answer: A. The full value of the quality improvement may be difficult to capture

Explanation: GDP is measured using observed market prices and quantities, but quality improvements are not always fully reflected in prices or recorded in a way that statistical agencies can isolate. If the physical quantity remains unchanged, conventional measures may understate the additional value and welfare created by better quality. This creates a measurement problem, so option A is correct.

Correct answer: A. A foreign company produces goods inside the country

Explanation: GDP measures the market value of final goods and services produced within a country's domestic territory during a period, regardless of the nationality or ownership of the producer. Thus, production by a foreign-owned company located inside the country is included in domestic GDP. The other transactions do not represent current domestic production.

Correct answer: A. GDP of the country where production occurred

Explanation: GDP follows the geographical location of production, not the nationality of the worker or owner. Therefore, wages paid for productive work performed within a country's domestic territory are part of the income generated by that country's domestic production and are included in its GDP. Nationality matters more when calculating national income through net factor income from abroad.